article 12-31-2013

Royce Global Value Fund Manager Commentary

It was a very disappointing year for Royce Global Value Fund on both an absolute and relative basis. The Fund was up 6.3%, lagging its global small-cap benchmark, the Russell Global Small Cap Index, which gained 24.8% for the same period. So while non-U.S. equities trailed their domestic cousins in 2013, our own results were well short both of the benchmark and our own expectations for the portfolio. (2013 was also a difficult year for many of the foreign currencies to which portfolio holdings had exposure, including the Japanese yen, South African rand, Indian rupee, and Turkish lira, all of which weakened versus the U.S. dollar.)

The first quarter was a solidly bullish period for many stocks around the world but was particularly good for U.S. companies—non-U.S. equities generally had lower returns. In this otherwise robust period, the Fund underperformed its benchmark by a wide margin, gaining 0.8% in the year’s opening quarter while the global small-cap index rose 8.6%. This left the Fund with a lot of ground to make up versus the benchmark at the beginning of the second quarter, a far more volatile period than the first. Global Value failed to hold its value when global share prices were mostly falling from April through June. For the quarter as a whole, the Fund fell 5.5% compared to a decline of 1.7% for the benchmark.

While most U.S. indexes finished the more unsettled second quarter in the black, many non-U.S. companies did not begin to recover until the third quarter was underway. For the most part, their rebound was less pronounced than that of their U.S. peers, also giving the global indexes lower returns in the bullish third quarter as investors throughout the world adjusted to rising rates and taper talk here in the U.S., ongoing uncertainty and, in some countries, recession in Europe, and less-than-stellar news out of China, Turkey, and Brazil. All that considered, the developed world’s stock markets were remarkably resilient in the second half of 2013. For the third quarter, the Fund rose 7.1%, behind its benchmark’s 10.5% increase. The fourth quarter brought more rising stock prices across the globe, though mostly at a more subdued pace than in the third. The Fund was again behind the Russell Global Small Cap Index, up 4.2% versus 5.8% for its benchmark. The Fund did, however, manage to stay ahead of the global small-cap index for the since inception (12/29/06) period ended December 31, 2013. In October, we made a change to the Fund’s portfolio management: Whitney George manages the Fund, assisted by David Nadel. Whitney has managed the Fund since its inception. David served as assistant portfolio manager from the Fund’s inception until 2009 and as co-manager of the Fund with Whitney from 2009 through October 21, 2013.

Materials was the only sector to finish the period in the red. By far, the bulk of its losses came from holdings in the metals & mining industry, which endured plummeting revenue and stock prices in light of the respective 36% and 28% drops in silver and gold prices in 2013. During various points in the year, this drove many companies’ valuations to what we saw as rock-bottom levels that have not been reached since the lows of late 2008-early 2009. Still, during May we chose to sell some of the Fund’s largest detractors in the industry, such as Allied Nevada Gold, Medusa Mining, and B2Gold. After first reducing our stake in Hochschild Mining—one of 2012’s top contributors—we added shares in the fourth quarter. We also chose to build our position in Pan American Silver with purchases in February and May as we think it is well positioned for an eventual turnaround for the industry.

A slumping share price led us to more than triple our position in Daphne International Holdings during 2013. Daphne is a Chinese footwear maker and retailer, which sells Aerosole shoes in China. Its strong management and market position gave us confidence in company’s long-term potential, though we recognize that this investment is likely to require patience. The overall slowdown in the Chinese economy has taken its toll on Daphne’s business as lower levels of consumer spending in particular caused sales and revenues to decline. We also increased our stake in Maharashtra Seamless, an Indian company that makes seamless and ERW (electric resistance welded) pipes and tubes. Slowing growth in the Indian economy and ongoing pipe dumping in that country led to a steep decline in demand and order inflow.

Global Value’s two top contributors were both closer to home and its two largest holdings at the end of the period. Irvine, CA-based hard disk drive maker Western Digital is one of two firms that dominate disk drive production worldwide. Its core business, which involves solutions for the collection, storage, management, and protection of digital content, has long interested us. The company made several savvy acquisitions in 2013, including Virident, sTec, and VeloBit. These moves made Western a stronger player in both the hard disk drive and flash technology markets, in addition to its growing presence in cloud storage technology. Helmerich & Payne provides contract drilling of oil and gas wells in the Gulf of Mexico and South America and also operates land and platform rigs. The company continued to leverage its technological leadership in the drilling rig business into market share gains as E&P (exploration & production) companies upgrade their fleets to improve drilling efficiencies and lower their total well costs.

Top Contributors to 2013 Performance

Western Digital 2.13%
Helmerich & Payne 1.45
Recordati 1.23
Nihon M&A Center 1.08
Industrias Bachoco ADR 0.81
1 Includes dividends

Top Detractors from 2013 Performance1

Hochschild Mining -1.67%
Allied Nevada Gold -1.38
Daphne International Holdings -1.29
Medusa Mining -0.87
Maharashtra Seamless -0.83
1 Net of dividends

Average Annual Total Returns as of Quarter-End 12/31/13 (%)

  QTR YTD 1YR 3YR 5YR Since
Global Value 4.19 6.28 6.28 -1.37 16.08 5.42 12/29/2006
Russell Global SC 5.83 24.77 24.77 8.09 18.49 4.68 N/A

Annual Operating Expenses: Gross 1.81% Net 1.70%

Current month-end performance may be obtained from our Prices and Performance page.

Important Disclosure Information

All performance information in this Report reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 180 days of purchase may be subject to a 2% redemption fee payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained here. All performance and risk information reflects results of the Service Class (its oldest class). Price and total return information is based on net asset values calculated for shareholder transactions. Certain immaterial adjustments were made to the net assets of Royce Global Value Fund at 12/31/13 for financial reporting purposes, and as a result the net asset values for shareholder transactions on that date and the total returns based on those net asset values differ from the adjusted net asset values and total returns reported in the Financial Highlights. Gross operating expenses reflect gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. Net operating expenses reflect contractual fee waivers and/or reimbursements. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses to the extent necessary to maintain the Fund’s net annual operating expenses, other than acquired fund fees and expenses, at or below 1.69% through April 30, 2014. Regarding the two “Good Ideas” tables shown above, the sum of all contributors to, and all detractors from, performance for all securities in the portfolio would approximate the Fund’s performance for 2013.

The thoughts expressed in this piece concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2013, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds' portfolios and Royce's investment intentions with respect to those securities reflect Royce's opinions as of December 31, 2013 and are subject to change at any time without notice. There can be no assurance that securities mentioned above will be included in any Royce-managed portfolio in the future.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. The Fund may invest a significant portion of its assets in foreign companies which may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. (Please see "Investing in Foreign Securities" in the prospectus.) Therefore, the prices of the securities of foreign companies in particular countries or regions may, at times, move in a different direction than those of the securities of U.S. companies. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss. In addition, as of 12/31/13 the Fund held a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of any one of these stocks would cause the Fund's overall value to decline to a greater degree. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell Global Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. Index returns include net reinvested dividends and/or interest income. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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